Key Aspects of US Foreign Corrupt Practices Act, 1977

By: Mr. Satish Prabhu - 21st August, 2019

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Purpose of FCPA

Congress enacted the U.S. Foreign Corrupt Practices Act (FCPA or the Act) in 1977 in response to revelations of widespread bribery of foreign officials by U.S. companies.

The Act was intended to

  1. Halt those corrupt practices,
  2. Create a level playing field for honest businesses, and
  3. Restore public confidence in the integrity of the marketplace.
Historical Background

Congress enacted the FCPA in 1977 after revelations of widespread global corruption in the wake of the Watergate political scandal.

SEC discovered that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas. SEC reported that companies were using secret "slush funds" to make illegal campaign contributions in the United States and corrupt payments to foreign officials abroad and were falsifying their corporate financial records to conceal the payments.

In 1988, Congress amended the FCPA to add two affirmative defenses:

  1. The local law defense; and
  2. The reasonable and bona fide promotional expense defense

In 1998, the FCPA was amended to conform to the requirements of the Anti-Bribery Convention. These amendments expanded the FCPA's scope to:

  1. Include payments made to secure "any improper advantage";
  2. Reach certain foreign persons who commit an act in furtherance of a foreign bribe while in the United States;
  3. Cover public international organizations in the definition of "foreign official";
  4. Add an alternative basis for jurisdiction based on nationality; and
  5. Apply criminal penalties to foreign nationals employed by or acting as agents of U.S. companies.
The FCPA contains both anti-bribery and accounting provisions.

The FCPA addresses the problem of international corruption in two ways:

  1. The anti-bribery provisions, prohibit individuals and businesses from bribing foreign government officials in order to obtain or retain business and
  2. The accounting provisions, impose certain record keeping and internal control requirements on issuers, and prohibit individuals and companies from knowingly falsifying an issuer's books and records or circumventing or failing to implement an issuer's system of internal controls.

Violations of the FCPA can lead to civil and criminal penalties, sanctions, and remedies, including fines, disgorgement, and/or imprisonment.

Anti-Bribery Provisions:

The FCPA's anti-bribery provisions apply broadly to three categories of persons and entities:

  1. "Issuers" and their officers, directors, employees, agents, and shareholders;
  2. "Domestic Concerns" and their officers, directors, employees, agents, and shareholders; and
  3. Certain persons and entities, other than issuers and domestic concerns, acting while in the territory of the United States.

In general, the FCPA prohibits offering to pay, paying, promising to pay, or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business.

What Are Facilitating or Expediting Payments?

The FCPA's bribery prohibition contains a narrow exception for "facilitating or expediting payments" made in furtherance of routine governmental action.

The facilitating payments exception applies only when a payment is made to further "routine governmental action" that involves non-discretionary acts.

Examples of "routine governmental action" include processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water.

Routine government action does not include a decision to award new business or to continue business with a particular party.

Nor does it include acts that are within an official's discretion or that would constitute misuse of an official's office.

Thus, paying an official a small amount to have the power turned on at a factory might be a facilitating payment; paying an inspector to ignore the fact that the company does not have a valid permit to operate the factory would not be a facilitating payment.

Accounting Provisions:

In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies.

The FCPA's accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting.

The accounting provisions consist of two primary components.

  1. First, under the "books and records" provision, issuers must make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer's transactions and dispositions of an issuer's assets.
  2. Second, under the "internal controls" provision, issuers must devise and maintain a system of internal accounting controls sufficient to assure management's control, authority, and responsibility over the firm's assets.
The Consequences of an FCPA Violation

There are direct and indirect consequences to committing a violation under the Foreign Corrupt Practices Act. The general consequences can be broken down as follows;

FCPA Violation

Individuals

Enterprises

For Bribery Violations:

Criminal Penalty

up to $250,000 per violation along with 5years imprisonment

up to $2,000,000 per violation

Civil Penalty

up to $16,000 per violation

up to $16,000 per violation

For Accounting Violations:

Criminal Penalty

up to $5,000,000 per violation along with 20years imprisonment

up to $25,000,000 per violation

Civil Penalty

up to $150,000 per violation

up to $750,000 per violation

Collateral Consequences

It should be noted that these are basic guidelines.

  1. In addition to fines, companies are required to forfeit all the profits gained from these violations.
  2. In certain extremely egregious cases, the court can instead order the violating entity to pay twice the profit gained from the violation as a fine.
  3. Aside from basic monetary damages, companies can face other problems from FCPA violations. The federal government can bar them from bidding on government contracts.
  4. They can even essentially have their ability to do international business cut off by having export privileges revoked.
FCPA Awareness Trainings and FCPA Due diligence
  1. As the risks of violating the FCPA are significant, business entities needs to take proactive measures to prevent and preempt any practices which may be viewed as violation of FCPA.
  2. Training employees to sensitize on FCPA issues and conduct periodic FCPA due diligence would definitely help organizations mitigate risk of probable FCAP violations.

Thanks for your time and a patient readings

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Source of Information:

A Resource Guide to the FCPA U.S. Foreign Corrupt Practices Act By the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission


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